752 / 772
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Fund Family Shareholder Association
www.adviseronline.comthe first 21 full months it has been in
business, there have been nine months
when Total World Stock Index declined.
During those months, Global Minimum
Volatility outperformed the index fund
by an average 2.0 percentage points. In
the other 12 months, when Total World
Stock Index was up, that index fund’s
outperformance averaged a minuscule
0.3 percentage points. In fact, Global
Minimum Volatility outperformed the
index fund in up months more than half
the time. That’s impressive.
What’s going on here? Well, Jeff and
I gave you some thoughts in the April
letter, but here are the basics: The fund’s
objective is to have broad, global stock
exposure with less volatility by building
a portfolio of stocks that have exhib-
ited historically lower volatility but also
fit the parameters of a portfolio that
doesn’t differ in its industry exposures
from the benchmark. In addition, the
fund’s managers attempt to minimize or
eliminate currency risk. With the dol-
lar’s strong climb of between 15% and
20% against currencies like the yen and
the euro, currency hedging has contrib-
uted mightily to performance.
Have investors found this fund yet?
Well, it got a running start at incep-
tion when Vanguard allocated 20% of
Managed Payout
’s assets to it, though
in August it was cut back by about
5% as money was shifted to the newer
Alternative Strategies
and to bulk
up Total International Stock a bit. So,
about one-quarter of the fund’s assets
can be accounted for by Managed
Payout. Beyond that, inflows have been
steadily rising since late last year.
Global Minimum Volatility has
merit, and even more so as long as the
dollar remains strong. Once the cur-
rency tables turn, however, outperfor-
mance may fade, and if it does, inves-
tors may sell as quickly as they bought.
It’s too soon to tell, but right now this
fund definitely earns its Buy rating.
International Explorer
Hold.
As I’ve said many times,
this fund faces stiff competition from
its passive cousin,
World ex-U.S.
SmallCap Index
, but at present it’s
winning the race.
It should be noted that the two
funds’ benchmarks are different, with
the active fund measured against an
S&P index and the index fund mea-
sured against a FTSE index. Regardless
of benchmarks, though,
International
Explorer
, like the index fund, is
focused on small-cap foreign stocks.
In my mind, that long-term objective
should favor active management, since
separating the wheat from the chaff
is critically important when selecting
among smaller foreign firms operating
in multiple countries using multiple
currencies and reporting under multiple
accounting rules and regulations. But
how it’s being executed may ultimately
be International Explorer’s downfall.
Schroder Investment Management’s
team, led by MatthewDobbs in London,
can take credit for the fund’s early suc-
cess. (This is the same Schroders that
oversees a portion of
International
Growth
.) Dobbs says that superior
earnings growth is the key to the fund’s
investment strategy.
However, after a fantastic run as a tiny
fund, Schroders’ performance turned
lackluster. The addition of Wellington
Management’s Simon Thomas to the
fund didn’t seem to make much of a
performance difference initially, but he
seems to have gained some mojo over
the last couple of years, helping returns.
One important factor that makes this
fundworthy is that, alongwith Emerging
Markets Stock Index and World ex-U.S.
SmallCap Index, it has the lowest cor-
relation with U.S. markets. By knock-
ing the fund’s minimum from $25,000
down to $3,000, Vanguard has made
this diversifying fund more accessible
to smaller investors, but whether it’s
the best for your portfolio is a question
I’m asking myself more and more these
days. If you own it, okay. But I am not
pounding the table to buy it.
International Growth
Buy.
I always considered this fund’s
former lead manager, Richard Foulkes,
one of the best of the breed among
international investors. Since he retired
10 years ago, in October 2005, though,
Foulkes’ replacements have slowly seen
their portion of the portfolio eroded as
more money was given to two relative
newcomers, one of which now leads
the show.
Today, Baillie Gifford handles a bit
more than 50% of assets, and M&G
Investment Management runs 13% or
so, leaving Schroders with a bit more
than one-third of the fund’s assets.
Unlike many of Vanguard’s multi-
managed fund messes, this trio hasn’t
exploded the portfolio to hold hundreds
of stocks—it currently has less than
170, and the top 10 represent almost
one-quarter of the fund’s assets. That’s
solid. And performance has been, too,
with International Growth outpacing
Total International Stock Index consis-
tently over time. That doesn’t mean the
fund will outpace the index month after
month. In fact, over the almost three
years since Baillie Gifford’s weight
in the fund stabilized at around 50%,
International Growth has only outpaced
the index in 16 of 33 months. But its
outperformance more than makes up
for its underperformance, hence my
Buy rating here.
International Value
Hold.
I’ve referred to
International
Value
as something of a multimanaged
mess in the past, with four separate
teams (AllianceBernstein, Edinburgh
Partners, Hansberger Global Investors
and Lazard Asset Management) all han-
dling pieces of the pie. But a couple of
those managers have been fired and the
new makeup hands one-quarter of fund
assets to ARGA Investment Managed
(hired in 2012), 35% to Lazard (on
board since 2006), and almost 40% to
Edinburgh Partners (who’ve been here
since 2008). It wasn’t until around
2011 that performance began to pick
up, though like International Growth,
the month-to-month outperformance
or underperformance relative to Total
International Stock is all over the map.
Over the past few years, International
Growth and International Value have
run about neck-and-neck, and the lat-
ter’s portfolio of 155 stocks is also
more concentrated than in years past,
though just 17.4% of assets are in its 10
largest holdings. With all the manager
musical chairs of the last few years,
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